“TRADE IS A TWO WAY STREET”
“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”
PRESIDENT RONALD REAGAN, JUNE 28, 1986
US CHINA TRADE WAR NEWSLETTER–APRIL 15, 2014
There have been major developments in the trade, Chinese Antidumping, 337, litigation, US/Chinese antitrust, and securities areas.
THE ANTICOMPETITIVE IMPACT OF US ANTIDUMPING LAW IN CHINA AND THE US
Last week, I gave a speech in Washington DC on a paper that eventually will become an article in the Journal of Antitrust Enforcement. The point of the paper is that the continued decision of the Commerce Department to treat China as a nonmarket economy country to justify its refusal to use actual Chinese prices and costs in China to determine antidumping rates for Chinese companies has had a substantial anticompetitive impact on US companies both in China and the United States.
In recent Hardwood Plywood Antidumping case, Commerce used values in Bulgaria to calculate costs in a Chinese antidumping case. In the 12th Mushrooms Review Investigation, Commerce switched surrogate countries from India to Columbia and used surrogate values that were a hundred times higher for rice straw and cow manure and rates went from 0s and 2.17% to 200 to over 300%. See Certain Preserved Mushrooms from the People’s Republic of China, 77 Fed. Reg. 55,808 (Dep’t Commerce Sept. 11, 2012). US import companies are the companies that must pay these increased antidumping duties.
Specifically, in the Mushrooms case, Commerce used Columbia import prices as surrogate values for rice straw and the value went from 8 cents a kilogram in the prior review to $1.35 a kilogram. Commerce also used import statistics for cow manure and the surrogate value went from 2 cents a kilogram in the prior review to $1.33 a kilogram to value this raw material input. By the way, how many countries actually import cow manure?
As a result, all Chinese preserved mushrooms have been shut out of the United States. On November 14, 2013, more than a year after Commerce’s final determination in the Preserved Mushrooms review investigation, the Court of International Trade reversed the Commerce’s surrogate value determination in Blue Field (Sichuan) Food Industrial Co., Ltd. v. United States, Slip Op. 13-142 (Nov. 14, 2013), but the damage has already been done. Many Chinese companies have simply given up and most Chinese preserved mushrooms are excluded from the US market.
Mushrooms may not sound that important, but it is simply an example of the unfair trade practice, which is called US antidumping cases against Chinese companies. In fact, the Commerce Department has used bogus numbers from surrogate third countries based on industrial policy and protectionism to calculate Chinese company costs and antidumping rates for decades. The effect of this practice has been to shut out of the US market billions of dollars in Chinese products by US antidumping and countervailing duty orders for as long as 30 years. But now the anticompetitive chickens are coming home to roost.
In China the Chinese government and the Chambers of Commerce created export price floors to deter dumping. These export price floors, in turn, have provoked US antitrust cases. See discussion of the Vitamin C case below. In Section 11 of the WTO Accession Agreement, however, China agreed to “eliminate all taxes and charges applied to exports . . . . “ The WTO has determined in a series of cases that China cannot implement export price floors to deter antidumping cases.
So what does Chinese do? It employs reciprocity and brings its own antidumping and countervailing duty cases against US companies, and as explained below, now antitrust cases against US companies to deter trade cases. China is bringing a large gun to a knife fight. What goes around comes around. So we now have a trade war with China that is spreading into other legal areas. Although China may not sound important to the average American, with a consumer market of 1.6 billion people, it is a larger market than the US and the best-selling car was the Buick, now the Ford Fusion.
Moreover, the Antidumping and Countervailing Duty Orders have not accomplished their intended purpose. Bethlehem Steel had protection through antidumping and countervailing duty orders from Steel imports for 30 years. Is Bethlehem Steel alive today?
The question, however, is whether on December 11, 2016 the US Commerce Department will follow Section 15(d) of US China WTO Accession Agreement and the demand the US made in a Treaty with China that the nonmarket methodology will expire “15 years after the date of accession.” To date, the answer apparently is no—treaties between the US and China simply have no meaning. Commerce will simply look at the statute.
But as indicated above and below, what goes around comes around and the Chinese government can play games with US companies too. Maybe it is time for the US government to follow the treaty that it signed and call off the Trade War with China that is expanding into a number of different legal areas.
TRADE WORKS BETTER WITH FREE FLOW OF IMPORTS AND EXPORTS IN COMPETITIVE MARKETS
Recently in an article published in the Washington Post entitled “How to deal with Russia without reigniting a full-fledged Cold War psychology” SCHULTZ NUNN the-us-strategy-for-keep George P. Schultz, former Secretary of State under President Reagan, and Sam Nunn, former Senator and Chairman of the Armed Services Committee, commented on the problems regarding Russia’s invasion of Crimea. But in the Article, they made a general statement about the importance of trade relations as a basis for peace between countries, which applies directly to the relationship between the United States and China. They stated:
“The world works better when governments have a representative quality, when the corrupt brand of excessive bureaucracy is lessened, and when economies are open to imports and exports in competitive markets. Recent history has shown the damage done to global security and the economic commons by cross-border threats and the uncertainty that emanates from them.”
One of the basic foundations for peace is the Rule of Law. But the Commerce Department’s decision for 30 years to use clearly bogus surrogate values to calculate Chinese costs in antidumping cases has created a very cynical view of US law in China. Since the US antidumping law is often the first US law Chinese encounter, the Chinese government and many Chinese companies and individuals believe that the US will simply twist its own law for protectionist purposes as a way to advance US industrial policy. But now China can respond in the same way twisting its own law as applied to US companies to advance its own industrial policy. As one Chinese antitrust lawyer stated to me recently, the Chinese government looks at Chinese antitrust/competition law as a “weapon” to help consumers or, as some may view it, a way to advance Chinese industrial policy, much as the US Commerce Department has done with the US antidumping law.
TRADE NEGOTIATIONS—TPA, TPP, TTIP/TA AND BALI/DOHA ROUND
As mentioned in past newsletters, in the trade world, the most important developments may be the WTO negotiations in Bali and the Trans Pacific Partnership (TPP) and Trans-Atlantic (TA)/ the Transatlantic Trade and Investment Partnership or TTIP negotiations. These trade negotiations could have a major impact on China trade, as trade issues becomes a focal point in Congress and many Senators and Congressmen become more and more protectionist.
This is particularly a problem because the protectionism is coming from the Democratic side of the aisle. Democratic Senators and Congressmen are supported by labor unions. To date, President Obama cannot get one Democratic Congressman to support Trade Promotion Authority (“TPA”) in Congress. Without bipartisan/Democratic support for these Trade Agreements, Republicans will not go out on a limb to support President Obama and risk being shot at by the Democrats during the mid-term elections as soft on trade.
As mentioned, in my February post, on January 29th, the day after President Obama pushed the TPA in the State of the Union, Senate Majority leader Harry Reid stated that the TPA bill would not be introduced on the Senate Floor.
To summarize, on January 9, 2014, the Bipartisan Congressional Trade Priorities Act of 2014 was introduced into Congress. See February Post on this Blog for a copy of the bill. The TPA bill gives the Administration, USTR and the President, Trade Promotion Authority or Fast Track Authority so that if and when USTR negotiates a trade deal in the TPP or the Trans-Atlantic negotiations, the Agreement will get an up or down vote in the US Congress with no amendments.
Under the US Constitution, Congress, not the President has the power to regulate trade with foreign countries. Article 1, Section 8, Clause 3, of the Constitution empowers Congress “to regulate Commerce with foreign nations” Thus to negotiate a trade agreement, the Congress gives the Executive Branch, the Administration/The President and United States Trade Representative (“USTR”), the Power to negotiate trade deals.
Because trade deals are negotiated with the foreign countries, the only way to make the system work is that under the TPA law when the Trade Agreement is negotiated, the Congress will agree to have an up or down vote on the entire Agreement and no amendments to the Agreement that has already been negotiated will be allowed.
Now the story continues . . . .
On March 4, 2014, in its 2014 trade policy agenda the White House set a new goal of completing a TPP agreement in 2014. The White House announced that it expects to conclude TPP negotiations and make substantial progress in the TTIP negotiations with Europe this year.
U.S. Trade Representative Michael Froman stated that moving forward with this Trade Agenda will increase domestic job growth by eliminating high duties and nontariff barriers against U.S. products abroad. The administration said it would work to conclude negotiations on the Trans-Pacific Partnership (“TPP”) this year.
“In the coming year, USTR will continue to execute the president’s trade vision that relies on opening markets, leveling the playing field for American workers and producers, and fully enforcing our trade rights around the world,” Froman said.
On March 7, 2014 a Senior Obama Administration official stated that the TPP negotiations are “almost complete.” The statement was made in the context of Vice President Joe Biden’s trip to Chile, during which the vice president discussed the TPP and other trade ties with the South American nation.
On March 11, 2014 at a National League of Cities conference in Washington, D.C. USTR Froman urged Congress to grant the administration fast-track authority to expedite approval of the TPP. Throughout his remarks, Froman suggested the TPP would be essential for the U.S. economy’s future and would promote an increase in cross-border business in Asia. Froman stated that currently, there are an estimated 500 million middle-class consumers in Asia — a number that is expected to reach 2.7 billion by 2030. Froman stated that if those projections hold up, the Asian market in 25 years will be about six times the size of the U.S. market. He also stated:
“If we don’t open those markets, help raise the standards and define the rules of the game, other countries will and we will be left on the sidelines, excluded from the fastest growing markets in the world, dealt out of global supply chains, facing a race to the bottom that we cannot win and should not run.”
On March 13th, however, it was reported that the U.S. and Japan still have gaps in their positions on lowering agricultural tariffs as part of the TPP negotiations. According to USTR, after two days of bilateral negotiations there was “limited progress.” Coming out of two days of negotiations on March 12, the USTR’s office stated that US and Japanese officials have not made much progress and that “working-level” discussions would continue.
The USTR is to speak at the end of April to the House Ways and Means Committee, but his testimony was released on April 3, 2014. FROMAN TESTIMONY As part of this speech, USTR Froman will state:
“Over the past four years, U.S. exports have increased to a record high of $2.3 trillion in 2013. In fact, a third of our total economic growth is attributed to this increase in U.S. exports. “Exports mean jobs. Each $1 billion in exports supports 5400-5900 U.S. jobs. 11.3 million Americans now owe their jobs to exports – an increase to 1.6 million jobs in the last 5 years – and those jobs pay 13-18 percent more on average than non-export related jobs.”
“In 2014, we will work to conclude negotiations on the TPP agreement. TPP is currently being negotiated among 12 countries in the fastest growing region in the world representing nearly 40 percent of global GDP and a third of global trade.” . . .
“As we pursue this agenda, we will continue to consult with Congress and seek input from a wide range of advisors, stakeholders and the public. We have held over 1,200 meetings with Congress about TPP alone – and that doesn’t include the meetings we’ve had on T-TIP, TPA, AGOA or other trade initiatives. Our Congressional partners preview our proposals and give us critical feedback every step of the way. We also ensure that any Member of Congress can review the negotiating text and has the opportunity to receive detailed briefings by our negotiators. . . .
“Finally, let me say a word about Trade Promotion Authority (TPA). The last TPA legislation was passed over a decade ago. Much has changed since that time. There has been the May 10th, 2007 agreement on labor, environment, innovation, and access to medicines. There has been the emergence of the digital economy and the increasing role of state-owned enterprises in the global economy. These issues should be reflected in the statutory negotiating objectives of a new TPA bill.
“We have heard from many that TPA needs to be updated. We agree. The Administration welcomed the introduction of bipartisan TPA legislation in January and look forward to working with this Committee and Congress as a whole to secure trade promotion authority that has as broad bipartisan support as possible.
We also look forward to renewing Trade Adjustment Assistance (TAA) which expires at the end of this year as well.”
On April 8, 2014, at a speech at the Center for Strategic and International Studies in Washington, Republican Senator Orin Hatch, ranking Republican member of the Senate Finance Committee, criticized the Obama Administration’s efforts to advance the TPA approval process for the TPP and TTIP negotiations. Senator Hatch stated that the Administration had made only an “anemic” effort to obtain support for the renewal of Trade Promotion Authority.
As Senator Hatch stated, “No complex, economically significant trade agreement has ever been negotiated by any administration and approved by Congress without Trade Promotion Authority . . . . Sadly, this administration’s enthusiasm for TPA seems tepid at best. Despite publicly calling for approval of Trade Promotion Authority in the State of the Union, President Obama’s efforts to achieve its successful consideration have been anemic.”
Hatch introduced the TPA bill along with former Senate Finance Chairman Max Baucus, now the U.S. ambassador to China, and House Ways and Means Chairman Dave Camp, R-Mich.
Hatch stated, “We need the president’s active engagement and support. We need total political commitment from this administration to advancing TPA this year. Without it, we simply will not succeed. And, as persuasive as I am, I am not nearly as effective as President Obama can be in convincing Democrats that renewing trade negotiating authority must be a priority for our nation. There is still time, and I am hoping that President Obama will rise to the challenge.”
See Senator Hatch’s speech at http://csis.org/event/making-trade-work-america
On April 9, 2014, the next day, the new Senate Finance Committee Chairman Senator Ron Wyden announced that he was introducing a new TPA bill, what Senator Wyden calls Smart Track. In the attached speech, WYDEN SPEECH Senator Wyden spoke to the American Apparel Footwear Association Conference stating that his new bill would require the Administration to be more open in its trade negotiations and take environmental and labor issues along with currency manipulation into account in these trade negotiations. Senator Wyden stated:
“Today I want to talk about how trade in the 21st century can create good middle-class jobs and expand what I call the winners’ circle in our country.
It starts with the fact that American trade policy has always been a story of adaptation and change. . . .
Today’s challenges and opportunities, more than any other time in my lifetime, come down to creating more good-paying, middle-class jobs. It’s my view that every trade discussion, every single trade discussion, must now focus on how trade policy can be a springboard to high-skill, high-wage American jobs. Jobs in innovative fields that didn’t exist before the digital era. Jobs in high-tech manufacturing that can’t be easily outsourced. Jobs that give Americans a ladder into the middle class. Here’s the reality folks, or the one that I hear at every town meeting – I have another coming up in a week or so – millions of middle-class Americans simply don’t believe trade can help them get ahead, or they worry their voices aren’t being heard. A 21st century trade policy has to meet the needs of those who are middle class today and those who aspire to be middle class tomorrow. On my watch, I can tell you, those voices are not going to get short shrift in the Senate Finance Committee.
My basic philosophy with respect to trade is I want to see Americans grow and make things here, innovate and add value to them here, and ship them somewhere, whether in containers, on airplanes, or in electronic bits and bytes.
My view is there are opportunities for the U.S. to do that in trade agreements with nations across the Pacific and in Europe, but it is going to take fresh policies – adapted to the times – to make those trade agreements work for all Americans.
I want to be very clear: only trade agreements that include several ironclad protections based on today’s great challenges can pass through Congress. I am not going to accept or advance anything less.
First, trade agreements must be enforceable, and not just in name only. The United States has to follow through on enforcement at home and around the world. If it doesn’t, trade agreements will not deliver on their job-creating potential and the economic winners’ circle, instead of expanding, could actually shrink.
A World Trade Organization ruling that came out just last week showed a great example of enforcement done right. China’s restrictions on rare earth mineral exports have done real damage to American businesses and consumers and could cost our country jobs across a wide array of industries.
Manufacturers of rechargeable batteries for hybrid and electric vehicles, MRI machines, night vision goggles and many others took a hit. My friend Leo Gerard from the United Steelworkers will tell you the impact China’s restrictions have had on his members’ jobs. So the U.S. stood up and challenged China in the WTO, and the WTO ruled in America’s favor – making clear that as a member of the global trading system, the Chinese have to play by the rules.
With American jobs on the line, all trade agreements ought to be enforced with that kind of vigor. Enforcement has to happen without hesitation over politics or other kinds of secondary considerations.
Right now, for example, Customs often appears to focus on security at the expense of its trade mission. Fake NIKE shoes and counterfeit computer chips with a fake Intel logo too often make their way past America’s border agents unnoticed. Foreign companies have evaded the trade remedy laws that protect American workers, like those in the solar and steel industries. A 21st century trade policy can’t work if the cops at the border aren’t doing an adequate job on the beat.
Second, trade agreements must promote digital trade and help foster innovation in areas where America leads, like cloud computing. When President Kennedy made his pitch for a modern trade policy to Congress five decades ago, nobody could have imagined what the digital world would become, or how important the Internet would be to the global economy. . . .
Fortunately, our country today enjoys a major trade surplus in digital trade that fuels the growth of high-quality, high-skill jobs. Twenty-first century trade agreements have to preserve this American advantage. They must prevent unnecessary restrictions on data flows or requirements to localize data and servers. Make no mistake about it, these NSA policies have harmed the American brand in parts of this debate and it’s something that I’m going to focus on changing, not just from the Finance Committee, but from the Intelligence Committee as well. They must include assurances that Internet companies have no more legal liability in foreign markets than they do in the U.S. There is a reason that America is home to the leading technology and Internet companies: our legal framework promotes innovation and the digital economy. . . .
Similarly, provisions like the PIPA and SOPA bill that would do so much damage to the Internet or result in its censorship have no place in trade agreements. I want everyone to know that I’ll do everything in my power on the Finance Committee to keep them out of future agreements. I welcomed Ambassador Froman’s statement in February that he is committed to keeping them out of TPP. It’s as simple as this: the Internet, which is really the shipping lane of the 21st century has to be kept open and free.
Third, trade agreements must combat the new breed of predatory practices that distort trade and investment and cost American jobs. Chinese state-owned enterprises, for example, don’t have the risk or borrowing costs that their American competitors do.
China’s indigenous innovation policies too often undermine American innovators by requiring them to relocate intellectual property. And currency manipulation undercuts American autoworkers and a number of our manufacturers here at home. Again, these are practices that cost good American jobs. They have the same harmful effects on American exports as any other trade barrier, so modern agreements – including the TPP – have to give our country the tools to level the playing field.
Fourth, some nations simply don’t share America’s commitment to labor and the environment, so when the U.S. doesn’t lead the way with strong standards and enforcement, trade agreements fall short. Commitments on these issues have to be core parts of trade agreements, rather than something like a side deal that’s just coasting along for the ride. This is one area where the U.S. has made progress. . . .
Finally, agreements must be ambitious, opening foreign markets and helping U.S. workers, farmers, manufacturers and service providers increase exports. . . .
Trade agreements also need to be part of a broader framework, including Trade Adjustment Assistance, that moves exports more efficiently to foreign markets and gives more Americans a chance to climb the economic ladder. There are people who argue that the benefits of trade deals have only gone to some. I argue that if we work to get better, more modern agreements that reflect the lessons of history, we can get trade deals that expand the winners’ circle and help revitalize the middle class. . . .
When it comes to trade talks, in my town hall meetings, people want to know what’s being negotiated. In my view the public has a right to know what the policy choices are. For its part, Congress has a constitutional responsibility to tell the President and the U.S. Trade Representative what they need to accomplish in trade deals, which it has traditionally done by passing trade promotion authority, or “fast-track.” I believe what’s needed to accomplish these things is different from a fast-track, or a “no-track,” and this afternoon I’d like to call it a “smarttrack.”
A smart-track will hold trade negotiators more accountable to the Congress, more accountable to the American people, and help ensure that trade agreements respond to their concerns of our people and their priorities, and not just to special interest groups. It will include procedures to get high-standard agreements through Congress, and procedures that enable Congress to right the ship if trade negotiators get off course. But to get better trade agreements, there must be more transparency in negotiations. The Congress cannot fulfill its constitutional duty on trade if the public doesn’t know what’s at stake or how to weigh in.
The public needs to know that somebody at USTR is committed to shedding more light on trade negotiations and ensuring that the American people have a strong voice in trade policy –a voice that is actually heard.
Going forward in the days and weeks ahead, I am going to work with my colleagues and stakeholders on a proposal that accomplishes these goals and attracts more bipartisan support. As far as I’m concerned, substance is going to drive the timeline.
Some would like to lay blame for lack of support for the TPA proposal recently introduced in Congress at the doorstep of the White House. The president and Ambassador Froman are, frankly, having a difficult time selling a product that members are not thrilled about. Policy matters, and arbitrary timelines won’t work. Instead of casting blame, our time would be better spent rolling up our sleeves and getting to work on policies that expand the winners’ circle for our people. Expanding the winner’s circle is going to mean that Americans see a trade agreement that they actually want to pass. That will build more bipartisan support for the president’s trade priorities. . . .”
An April 9th article in Roll Call described the difficult problem the Administration faces with Unions in the Trade area because of the upcoming mid-term elections. See http://www.rollcall.com/news/on_trade_obama_faces_a_tough_political_dance-232073-1.html?pg=2
FORMER CONGRESSMAN BONKER MARCH 17TH ARTICLE ON TPP AND CHINA IN CHINA DAILY
But on March 17, 2014, former Congressman Don Bonker of APCO published an article in the China Daily about the obstacles the Obama Administration is facing with regards to its trade agenda. BONKER ARTICLE As Congressman Bonker states:
“US President Barack Obama has such good intentions, but his lofty goals often become bridges to nowhere. The latest is international trade. This time the problem is not the Republicans, but his own party.
His administration has been actively negotiating two huge trade agreements, one with Pacific Rim countries and one with the European Union, yet Congress must first pass the Trade Promotion Authority bill to allow fast-track consideration of the two trade agreements.
However, the Democrats’ top leader in the US Senate, Harry Reid, has already set up a roadblock by cautioning that “everyone would be well advised just to not push this right now”. That is the sentiment of most Congressional Democrats who see this as a risky vote in an election year.
Maybe it is time for the Obama administration to take a break from pursuing contentious regional trade deals and give a higher priority to the US-China economic relationship. Why launch trade negotiations with 11 Asian countries and leave out China?
The Obama administration earlier portrayed the Trans-Pacific Partnership as a geopolitical strategy that would give the US a stronger presence in Asia, plus allow a protective shield for Asian countries feeling threatened by China’s growth and influence in the region. However, because the US already has trade pacts with six of the TPP countries, why cast a larger net that unnecessarily adds burden, if not controversy, to the negotiating process?
As the world’s two largest economies, the stakes are greater when it comes to China-US relations, as are the opportunities and challenges. Chinese investments in the US doubled last year to a record $14 billion and early this year had a jump start with Lenovo Group’s two huge purchases of Google Inc’s Motorola handset division for $2.9 billion and its purchase of IBM Corp’s low-end server unit for $2.3 billion.
At the same time, two large Chinese entities, Richard Li’s Hybrid Technology LLC and China’s largest auto parts company, Wanxiang Group Corp, were fiercely competing to take over the bankrupt Fisker Automotive Inc with plans to revive the electric sports car manufacturer.
True, Chinese investments in the US are increasing rapidly, but their numbers would have been larger were it not for the hostile environment many of China’s proposed acquisitions and mergers encounter.
The Wall Street Journal reported that the Lenovo acquisitions (both IBM and Google’s Motorola) will “likely draw scrutiny from US regulators and concern about security issues involving acquisitions by Chinese companies”. That certainly was the case with Huawei Technologies Co. Ltd. and ZTE Corp, two large Chinese telecom network providers.
What is being ignored are the economic benefits such investments bring to the United States, including job creation, which is a big issue this election year. According to the Rhodium Group, Chinese investments have created more than 70,000 jobs in the US and that number could reach 200,000 by 2020 (not to mention preserving the jobs of failed and bankrupt US companies), which is why US President Obama now sees foreign investment as important to growing the country’s economy.
Last October, at a Department of Commerce Investment Summit, President Obama announced the creation of Select USA, publically stating: “I want your companies to invest more here in the United States of America.” It was something of a clarion call to the world that all investments are now welcomed in the US.
Last year President Obama and Chinese President Xi Jinping agreed to revive negotiations for a China-US Bilateral Investment Treaty that is intended to break down the barriers to encourage more foreign investments between the two countries.
Yet is the US prepared to insulate the Committee on Foreign Investment in the United States process from being used for political and economic interests to block investments, and is China, for its part, willing to allow foreign investments in its protected industries, particularly State owned enterprises and in the financial, transportation and telecom sectors?
The flip side is the ever-increasing mercantile trade across the Pacific. The whole idea of the TTP is to lower tariffs, remove restrictions and improve market access among the participating nations. But it will likely encounter the same fate as the 20 free trade agreements previously negotiated by the US Trade Representative that ultimately were greeted with skepticism on Capitol Hill.
Nowhere is this more evident than US trade policies that are being unfairly aimed at China. America’s anti-dumping/countervailing duty laws are highly discriminatory in that they still treat China as a non-market economy, which guarantees the imposition of punitive tariffs that are proving harmful to businesses in both countries.
It certainly raises questions about the US’ protectionism, or at least the politicalizing of its trade policies, casting doubts on Congress acting responsibly and a President’s ability to deliver on important trade deals. Indeed former US trade representative Robert Zoellick once declared that “trade agreements were more about politics than economics”. Trying to address these issues will be a challenge. On the US side, it is a combination of old fashion protectionism, China bashing, distorted regulatory policies and domestic companies seeking protection from Chinese competition.”
The author, a former US Congressman, works with APCO Worldwide, an independent communications consultancy. . . . See the article at http://usa.chinadaily.com.cn/epaper/2014-03/17/content_17352705.htm
CAFC DENIES CONSTITUTIONAL CHALLENGE TO GPX LAW
On March 18, 2014, the Court of Appeals for the Federal Circuit (“CAFC”) in Guangdong Wireking Housewares & Hardware Co., Ltd. et al. v. United States, CAFC GXP NO CONSTITUTIONAL VIOLATION addressed the Congressional 2012 statute overruling the GPX decision and retroactively applying both antidumping and countervailing duties with respect to imports from non-market economy (“NME”) countries. In that decision, the CAFC affirmed the Court of International Trade that the Commerce Department does not have to adjust for double counting and that the retroactive imposition of both countervailing and antidumping duties does not violate the Ex Post Facto Clause of Article I, Section 9 of the U.S. Constitution.
CHINESE EXPORT TAXES ON RAW MATERIALS—WTO PROBLEMS
On March 26, 2014, the USTR announced that the WTO had sided with the United States, European Union and Japan in finding that China’s restrictions on the export of rare earth materials, tungsten and molybdenum violated its WTO accession commitments and the General Agreement on Tariffs and Trade (GATT). In the rare earth case, the USTR challenged three types of Chinese export restrictions– export duties, export quotas, and requirements for enterprises permitted to export the materials.
Although WTO rules do not require members to eliminate export duties, China committed in Paragraph 11.3 of China WTO Agreement to eliminate all export restraints, including duties, except for those on 84 specific tariff lines. Paragraph 11.3 of the US China WTO Agreement, which became the China WTO Agreement, specifically provides,” China shall eliminate all taxes and charges applied to exports unless specifically provided for in Annex 6 of this Protocol or applied in conformity with the provisions of Article VIII of the GATT 1994.” As the materials at issue in the rare earths case were not included in that list, the panel found that the export duties violated Paragraph 11.3.
Paragraph 11.3 is also the provision at the core of the Vitamin C antitrust case that the Chinese government cites in its Appellate Brief, which will be discussed more below. In fact, tungsten ore has been the target of a US antidumping action, and a US antidumping order was issued against China from Nov 21, 1991-Nov 3, 1999, shutting all tungsten ore out of the US for about 8 years.
All parties have 60 days or until May 25th to the WTO appeal the ruling. On April 9th, the USTR announced that for strategic purposes, it has appealed the decision so that it can get a WTO ruling that can be enforced against China.
On March 26, 2014, USTR WTO VICTORY RARE EARTH METALS AND 2011 VITORY the USTR specifically stated in its announcement of the WTO victory on Rare Earths, Tungsten and Molybdenum:
“United States Trade Representative Michael Froman announced today that a World Trade Organization (WTO) dispute settlement panel has agreed with the United States in a major dispute, finding in favor of U.S. claims that China’s imposition of export restraints on rare earths, tungsten, and molybdenum breach WTO rules. Rare earths, tungsten, and molybdenum are key inputs in a multitude of U.S-made products for critical American manufacturing sectors, including hybrid car batteries, wind turbines, energy-efficient lighting, steel, advanced electronics, automobiles, petroleum and chemicals.
“Time and again, the Obama Administration has made clear that we are willing to go to the mat for American workers and businesses to make sure that the playing field is fair and level,” said Ambassador Froman. “The United States is committed to ensuring that our trading partners are playing by the rules. We will continue to defend American manufacturers and workers, especially when it comes to leveling the playing field and ensuring that American manufacturers can get the materials they need at a fair market price.”
“China’s decision to promote its own industry and discriminate against U.S. companies has caused U.S. manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths. WTO rules prohibit this kind of discriminatory export restraint and this win today, along with our win 2 years ago in an earlier case, demonstrates that clearly.” . . .
The Chinese export restraints challenged in this dispute include export duties and export quotas, as well as related export quota administration requirements. These types of export restraints can skew the playing field against the United States and other countries in the production and export of downstream products. They can artificially increase world prices for these raw material inputs while artificially lowering prices for Chinese producers. This enables China’s domestic downstream producers to produce lower-priced products from the raw materials and thereby creates significant advantages for China’s producers when competing against U.S. and other producers both in China’s market and other countries’ markets. The export restraints can also create substantial pressure on foreign downstream producers to move their operations, jobs and technologies to China. . . .
This dispute builds on and expands an earlier victory that the United States achieved in 2011 challenging China’s use of export restraints on a different set of raw material inputs used in the steel, aluminum, and chemicals industries (bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorous and zinc). “ Emphasis added.
As stated many times on this blog, there are outstanding US antidumping orders against magnesium, foundry coke, manganese, and silicon metal, which have shut probably $1 billion of imports of these Chinese metal products out of the United States for decades. Exolon Esk, a one company US industry, tried to bring an antidumping case against Silicon Carbide, but failed. The US industry, however, did prevail in the Tungsten Ore case, leaving an antidumping order in place and shutting all Chinese tungsten ore out of the US market for almost 8 years.
Thus the USTR states:
Chinese export restraints . . . can skew the playing field against the United States and other countries in the production and export of downstream products. They can artificially increase world prices for these raw material inputs while artificially lowering prices for Chinese producers. This enables China’s domestic downstream producers to produce lower-priced products from the raw materials and thereby creates significant advantages for China’s producers when competing against U.S. and other producers both in China’s market and other countries’ markets. The export restraints can also create substantial pressure on foreign downstream producers to move their operations, jobs and technologies to China. . . .
But US antidumping orders against metal and chemical products from China based on bogus numbers that have no relationship to reality can have the exact same effect as export restraints, in many cases created by the Chinese government to deter US antidumping cases.
In effect, from the US government’s point of view it can have its cake and eat it too. Smash Chinese companies and US import companies with antidumping cases based on bogus numbers, and if the Chinese government tries to set an export price floor to deter dumping cases, slam China at the WTO.
In 2011, it was reported that U.S. lawmakers applauded the first WTO determination and called for speedy implementation of the decision.
“These WTO findings are crystal clear — China is manipulating the raw materials market at the expense of American businesses,” said Senate Finance Committee Chairman Max Baucus (D-MT) in a July 5, 2011 statement. “As a WTO member, China has a responsibility to play by the rules and respect the rights of its international partners.”
But will the same US lawmakers now do right by US importers, US downstream producers and China and follow the treaty the US signed and the demand it made and make China a market economy country in US antidumping cases on December 11, 2016? Or will the US Congress continue to seriously damage US companies, skewing “the playing field against the United States … in the production and export of downstream products.. . .” creating “substantial pressure” on US “downstream producers to move their operations, jobs and technologies to China . . . .”
USTR SEEKS COMMENTS ON CHINESE GOVERNMENT’S CHALLENGE TO US ANTIDUMPING CASES AGAINST CHINA
On April 8, 2014 the USTR published the attached notice in the Federal Register seeking comments by May 2, 2014 on a WTO complaint filed by China against various US antidumping cases. USTR NOTICE WTO DISPUTE SETTLEMENT NME SINGLE COUNTRY RATE Some of the specific issues raised by the Chinese government are targeted dumping and the use of zeroing in various initial and review antidumping investigations, the single rate presumption from non-market economies, the application of NME-wide methodology and the recourse to adverse facts available as the China wide rate.
APRIL ANTIDUMPING ADMINISTRATIVE REVIEWS
On April 1, 2014, Commerce published in the Federal Register the attached notice APRIL NOTICE REVIEW REQUEST SINKS regarding antidumping and countervailing duty cases for which reviews can be requested in the month of April. The specific antidumping and countervailing duty cases against China are: 1-Hydroxyethylidene-1, 1-Diphosphonic Acid, (HEDP), Activated Carbon, Drawn Stainless Steel Sinks, Frontseating Service Valves, Magnesium Metal, Non-Malleable Cast Iron Pipe Fittings, and Steel Threaded Rod.
For those US import companies that imported steel sinks, activated carbon and the other products listed above from China during the period April 1, 2013-March 31, 2014 or if this is the First Review Investigation, for imports imported after the Commerce Department preliminary determinations in the initial investigation, the end of this month is a very important deadline. Requests have to be filed by the Chinese suppliers, the US importers and US industry by the end of this month to participate in the administrative review.
This is a very important month for US importers because administrative reviews determine how much US importers actually owe in Antidumping and Countervailing Duty cases. Generally, the US industry will request a review of all Chinese companies. If a Chinese company does not respond in the Administrative Review, their antidumping and countervailing duty rate could well go to the highest level and for certain imports the US importer will be retroactively liable for the difference plus interest.
In my experience, many US importers do not realize the significance of the administrative review investigations. They think the antidumping and countervailing duty case is over because the initial investigation is over. Many importers are blindsided because their Chinese supplier does not respond in the administrative review, and the US importers find themselves liable for millions of dollars in retroactive liability.
On April 4, 2014, the US government indicted a Chinese citizen and two Iranian companies for violation of US export laws for illegally exporting devices used in the production of weapon-grade uranium to Iran.
In the indictment, CHENG INDICTMENT Sihai Cheng and several Iranian co-defendants were charged with violating U.S. export laws by conspiring to export U.S.-manufactured pressure transducers to Iran.
Cheng was arrested by British authorities on Feb. 7 while traveling in the U.K. and is being held there pending extradition to the U.S. According to the indictment, to evade US export controls, Cheng’s China agent set up front companies in China to pose as the end users in transactions with Cheng’s Shanghai office for the purpose of fraudulently obtaining export licenses from the U.S. If convicted, Cheng faces up to 20 years in prison and fines of up to $1 million for each export violation.
THE HYPOCRISY OF US PRISON LABOR ALLEGATION
For years, the US government and Congressmen have complained about Chinese companies using prison labor to produce products, which are exported to the United States. At a recent Housewares Show in Chicago, however, the Program Manager of the Business Development Group of the US Justice Department’s Federal Bureau of Prisons was going booth to booth saying that the prison factories run by the Justice Department’s Bureau of Prisons in the United States could match any Chinese price with US prison labor. What goes around does indeed come around.
CURTAIN WALLS ARE DEFINITELY IN THE ALUMINUM EXTRUSIONS CASE
In the attached second scope determination on curtain wall units, Commerce determined that curtain wall units are definitely covered by the Aluminum Extrusions Antidumping and Countervailing Duty Case. Commerce Complete and Finished Curtain Wall Ruling
IMPORT ALLIANCE FOR AMERICA/IMPORTERS’ LOBBYING COALITION
As mentioned in prior newsletters, we are working with APCO, a well-known lobbying/government relations firm in Washington DC, on establishing a US importers/end users lobbying coalition to lobby against the expansion of the antidumping and countervailing duty laws against China for the benefit of US companies.
On September 18, 2013, ten US Importers agreed to form the Import Alliance for America. The objective of the Coalition will be to educate the US Congress and Administration on the damaging effects of the US China trade war, especially US antidumping and countervailing duty laws, on US importers and US downstream industries.
We will be targeting two major issues—Working for market economy treatment for China in 2016 as provided in the US China WTO Agreement and working against retroactive liability for US importers. The United States is the only country that has retroactive liability for its importers in antidumping and countervailing duty cases. The key point of our arguments is that these changes in the US antidumping and countervailing duty laws are to help US companies, especially US importers and downstream industries. We will also be advocating for a public interest test in antidumping and countervailing duty cases and standing for US end user companies.
We are now contacting many US importers and also Chinese companies to ask them to contact their US import companies to see if they are interested in participating in the Alliance.
As indicated above, at the present time, Commerce takes the position that it will not make China a market economy country in 2016 as required by the WTO Accession Agreement. Changes to the US antidumping and countervailing duty law against China can only happen because of a push by US importers and end user companies. In US politics, only squeaky wheels get the grease.
In forthcoming newsletters we will provide additional information about the Alliance and specific meeting days in different areas of the United States.
TRADE ADJUSTMENT ASSISTANCE FOR FIRMS PROGRAM WORKS
As many of you may know, I am on the Board of Directors of the Northwest Trade Adjustment Assistance Center, the only trade program that actually works. We provide Federal Government assistance to US companies that have been injured by imports under the Trade Adjustment Assistance for Firm (“TAAF”) program. Total US government assistance to companies every year is $16 million. The US government provides workers $1 billion to retrain them if they have been injured by imports. Maybe this out of balance situation is the reason for some of the trade problems in the US.
The 2013 Report on the TAAF is attached FY13_TAAF_Annual_Report_to_Congress and can be found at http://www.eda.gov/pdf/FY13_TAAF_Annual_Report_to_Congress.pdf
Some of the key findings, however, are as follows:
“In Fiscal Year (FY) 2013, firms assisted by the U.S. Department of Commerce Economic Development Administration’s (EDA) Trade Adjustment Assistance for Firms (TAAF) program performed more successfully than the manufacturing industry as a whole, demonstrating a significant return on federal investment. . . .
Overall, the program is effective in helping firms become more competitive and overcome negative trade impacts. Examples of TAAF program benefits to manufacturing firms can be found in the supplement and the end of this report.
In FY 2013, firms participating in the U.S. Department of Commerce Economic Development Administration’s (EDA) Trade Adjustment Assistance for Firms (TAAF) program reported that, on average, their sales increased by 85 percent, employment increased by 43 percent, and productivity increased by 29 percent from the time of TAAF certification to the completion of the TAAF program. . . .
All TAAF-assisted firms that completed the program in FY 2011 were in operation at the end of FY 2013, indicating strong survival rates for TAAF-assisted firms in the face of import pressures.”
CHINESE ANTIDUMPING CASE
In response to the US and other antidumping and countervailing duty cases, China’s Ministry of Commerce (“MOFCOM”) is initiating their own antidumping and countervailing duty cases against the United States.
On March 19, 2014, MOFCOM initiated an antidumping case against Optical Fiber Preform products imported from the US and Japan. The Chinese petitioners are Yangtze Optical Fiber and Cable Company Ltd., Jiangsu Hengtong Optic-electric Co., Ltd, and Futong Group Co., Ltd.
The US respondent companies are Corning Incorporated and OFS Fitel, LLC. The Japanese respondent companies are: Shin-Etsu Chemical Co., Ltd., Sumitomo Electric Industries, Ltd., Fujikura Ltd., and Furukawa.
The US alleged antidumping rate is 25.42% and US imports into China are valued at $142,065,372. A translated initiation notice is attached. Information about Optical Fiber Preform Antidumping Case
On April 4, 2014, China issued final antidumping duties on cellulose pulp used in paper, textiles and other goods from the US, Canada and Brazil. The Canadian antidumping rates ranged from 13% for Fortress Specialty Cellulose Ltd. to 23.7% for all other Canadian companies.
The highest dumping rates were for the US companies with rates from 16.9% for Washington state’s Cosmo Specialty Fibers Inc. to 17.2% of Florida’s Rayonier Performance Fibers LLC. Washington-based Weyerhaeuser Co. received 17% and Georgia-Pacific LLC’s GP Cellulose received 33.5%. XINHUA PULP
WASHINGTON/PACIFIC COAST SHELLFISH BANNED FROM CHINA
With regards to the Chinese ban on shellfish from the West Coast, the Chinese government had detected inorganic arsenic in a November shipment of geoducks from Washington’s Poverty Bay. That shipment and another from Ketchikan, Alaska, that was tainted with algae toxin, led China on Dec. 3 to ban all imports of bivalve shellfish harvested in Washington, Alaska, Oregon and Northern California.
The ban has seriously hurt the Pacific Northwest shellfish industry, blocking imports to the major market for West Coast shellfish for several months now.
A March 21st trip to China by National Oceanic and Atmospheric Administration officials may have started the movement to a solution as they met with counterparts in Beijing, and talked about toxin testing methods. In a conference call with staff from Alaska Senators Lisa Murkowski and Mark Begich’s Offices, the NOAA administrator reportedly stated that the U.S. officials came away from the March 21 meeting optimistic about resolving the dispute, and eventually lifting the ban.
According to Senator Begich’s office, Chinese officials told the NOAA representatives that they were satisfied with Alaska’s PSP testing methods. But, more work is needed to satisfy Chinese concerns about arsenic, which came from Washington State.
With the US government so tough on imports of agricultural and seafood products from China, US exporters of agricultural and seafood products should expect the Chinese government to be just as tough on US exports to China.
What goes around does indeed come around.
US LITIGATION LIMITS AGAINST CHINESE COMPANIES AND INDIVIDUALS
On March 5, 2014, in the attached Guan v. Bi case, Judge William Orrick Ill of the California Federal District Court clarified the limited reach of federal courts over foreign litigants in two important respects. GUAN V BI CASE
Mr. Guan and his wife sued a group of Chinese individuals and the Chinese government’s Dalian Customs Anti-Smuggling Bureau for an alleged conspiracy to extort millions of dollars from the couple. The conspiracy included an alleged kidnaping of the couple in China.
Because plaintiffs refused the extortion demand, they were jailed for many months in China. After release and return to the US, the Chinese couple sued in California state court. The only defendant in the US sought to remove the case to Federal Court. But the US defendant lived in the same state as the couple and there was no diversity.
This case, however, was not removable under the ordinary grounds for removal – federal question and diversity jurisdiction. The contested issue, therefore, was whether the international character of the dispute created any additional paths for removal to Federal District Court from State Court. The Court held that when a foreign sovereign is sued in state court along with non-sovereign codefendants, only the foreign sovereign itself may remove the case to federal court under the Foreign Sovereign Immunities Act (FSIA).
Second, the presence of non-U.S. litigants on both sides of a case cannot create diversity jurisdiction where complete diversity doesn’t otherwise exist between U.S. litigants on each side.
PATENT/IP AND 337 CASES
ITC SAYS DIGTAL FILE TRANSFERS ARE IMPORTS UNDER SECTION 337
On April 3, 2014, the U.S. International Trade Commission (“ITC”) in Certain Digital Models, Digital Data, and Treatment Plans for Use in Making Incremental Dental Positioning Adjustment Appliances, the Appliances Made Therefrom and Methods of Making the Same affirmed that it has jurisdiction under 337 to prevent the international transmission of digital files that infringe patents. The ITC agreed with the Administrative Law Judge that electronic files are “articles” under 337 and found that their transmission constitute “importation” under the statute.
The agency issued cease-and-desist orders against defendant. The ITC specifically stated in the attached Federal Register notice, FED REG DIGITAL FILES CASE:
”Specifically, the Commission affirms the ALJ’s conclusion that the accused products are “articles” within the meaning of Section 337(a)(1)(B) and that the mode of bringing the accused products into the United States constitutes importation of the accused products into the United States pursuant to Section 337(a)(1)(B). The Commission has determined to find a violation with respect to (i) claims 1 and 4-8 of the `863 patent; (ii) claims 1, 3, 7, and 9 of the `666 patent; (iii) Claims 1, 3, and 5 of the `487 patent; (iv) claims 21, 30, 31 and 32 of the `325 patent; and (v) claim 1 of the `880 patent. The Commission has issued cease and desist orders directed to CCUS and CCPK, with an exemption for activities related to treatment of existing patients in the United States.”
A full copy of the opinion will be posted on my blog, when it is available.
STATE OF OKLAHOMA SUES CHINESE COMPANIES FOR COPYRIGHT INFRINGEMENT
On March 13, 2014, the State of Oklahoma through its attorney general sued Newayvalve Co., Neway Industrial Material (Suzhou) Co., Ltd., Neway Oil Equipment Co., Ltd., Neway Industrial Material (Dafeng) Co., Ltd., Neway Valve International Inc. and Neway Valve (Suzhou) Co., Ltd. for copyright infringement in China for use of unlicensed Microsoft software in China. In the attached complaint, AG Neway Complaint_3132014 the Oklahoma Attorney General states:
“Plaintiff State of Oklahoma (“Plaintiff’), by E. Scott Pruitt, the duly elected Attorney General of the State of Oklahoma, commences this action on behalf of the State of Oklahoma under the Oklahoma Deceptive Trade Practices Act (“ODTPA”), 78 O.S. § 51 et. seq., the Oklahoma Antitrust Reform Act (“OARA”), 79 O.S. § 201 et seq., and such other causes of action that exist at common law against Defendants Neway Valve Co., Neway Industrial Material (Suzhou) Co., Ltd., Neway Industrial Material (Dafeng) Co., Ltd., and Neway Valve International, Inc. (collectively, “Neway” or “Defendants”). Plaintiff alleges on information and belief as follows: . . .
1. Plaintiff brings this action to remedy violations of Oklahoma statutory and common law in connection with Defendants’ unfair, deceptive and anti-competitive business practices.
2. Defendants produce a variety of valves and other equipment for sale to the petroleum industry and, in doing so, compete directly with several Oklahoma-based companies for the business of oil and natural gas producers in Oklahoma.
3. However, instead of engaging in legitimate competition, Defendants have illegally utilized unlicensed software in the production and distribution of their valves. As set forth in detail herein; in an industry characterized by thin margins, Defendants have illegitimately and unlawfully reduced their production costs by illegally obtaining copyrighted software that is crucial to the production and sale of their products. Defendants’ unlawful conduct has created an uneven playing field that favors Defendants’ products over comparable products sold by Oklahoma manufacturers.
4. Generally, federal laws and international treaties do not address the pernicious downstream effects of such acts in the Oklahoma valve manufacturing sector. The Defendants’ use of stolen software to gain a competitive advantage over domestic valve manufacturing companies,’ including those in Oklahoma, can be remedied, however, by proscribing such tactics as unfair, deceptive and anti-competitive methods of commerce under Oklahoma law.
5. Plaintiff asks this Court to enjoin Defendants unlawful business practices, impose civil fines and penalties, and award restitution, monetary damages, investigative costs and fees, and attorney fees, as well as such other relief as the Court deems just and proper.”
NEW PATENT AND TRADEMARK CASES AGAINST CHINESE COMPANIES, INCLUDING HUAWEI
On April 7, 2014, Pragmatus Mobile sued ZTE for patent infringement. PRAGMATUS ZTE
On April 8, 2014, Billabong International Ltd, GSM Operations PTY Ltd. and Burleigh Point Ltd d/b/a Billabong USA sued Digital Shui dba Multisport Asia for cybersquatting (unlawfully occupying a domain name in which it possesses no rights) on the <billabong.com> domain name and then demanding exorbitant sums of money as ransom for the return of the control of the Domain Names to Plaintiffs. Defendant’s conduct allegedly violates the Anticybersquatting Consumer Protection Act, 15 U.S.C. 1125(d), (“ACPA”) and the Computer Fraud and Abuse Act, 18 U.S.C. 1030(a)(4), constitutes tortious interference with contract under Virginia common law, and also constitutes a breach of fiduciary duty, including the duty of loyalty and good faith and fair dealing. BILL4
On April 3, 2014, the attached products liability complaint was filed for wrongful death by Maxine Surber in the Federal District Court in the Western District of Washington States against the Shanghai Zhenhua Heavy Industries Co., Ltd. for the death of Jeff Surber who died while maintaining a ship to shore crane designed and manufactured by Shanghai Industries. PRODUCTS LIABILITY SHANGHAI COMPANY
EXTRADITION OF FOREIGN NATIONAL TO FACE CRIMINAL ANTITRUST CHARGES
On April 4, 2013, the Justice Department announced that it was successful for the first time in extraditing a foreign national to face charges related to a cartel, worldwide antitrust bid-rigging conspiracy related to marine hose sold in the United States. In the attached April 4th announcement, EXTRADITION OF FOREIGN NATIONAL the Justice Department stated:
“Romano Pisciotti, an Italian national, was extradited from Germany on a charge of participating in a conspiracy to suppress and eliminate competition by rigging bids, fixing prices and allocating market shares for sales of marine hose sold in the United States and elsewhere, the Department of Justice announced today. This marks the first successfully litigated extradition on an antitrust charge.
Pisciotti, a former executive with Parker ITR Srl, a marine hose manufacturer headquartered in Veniano, Italy, was arrested in Germany on June 17, 2013. He arrived in the Southern District of Florida, in Miami, yesterday and is scheduled to make his initial appearance today in the U.S. District Court for the Southern District of Florida in Ft. Lauderdale, at 11:00 a.m. EDT.
“This first of its kind extradition on an antitrust charge allows the department to bring an alleged price fixer to the United States to face charges of participating in a worldwide conspiracy,” said Assistant Attorney General Bill Baer in charge of the Department of Justice’s Antitrust Division. “This marks a significant step forward in our ongoing efforts to work with our international antitrust colleagues to ensure that those who seek to subvert U.S. law are brought to justice.”
Marine hose is a flexible rubber hose used to transfer oil between tankers and storage facilities. During the conspiracy, the cartel affected prices for hundreds of millions of dollars in sales of marine hose and related products sold worldwide. . . .
Pisciotti is charged with violating the Sherman Act, which carries a maximum penalty of 10 years in prison and a $1 million criminal fine for individuals. . . .
As a result of the department’s ongoing marine hose investigation, five companies, including Parker ITR; Bridgestone Corp. of Japan; Manuli SPa of Italy’s Florida subsidiary; Trelleborg of France; and Dunlop Marine and Oil Ltd, of the United Kingdom, and nine individuals have pleaded guilty.”
VITAMIN C CASE
As mentioned in my last e-mail, the Vitamin C case is wrapping up at the District Court level. The final judgment was revised downward from $153 million to a $147 million judgment because of double counting against by Hebei Welcome Pharmaceutical Co., Ltd. (“Hebei”) and North China Pharmaceutical Group Corp. (“NCPGC”) for price fixing.
On April 7, 2014, Hebei and NCPGC filed the attached appeals brief Hebei vitamin c appeal brief with the Second Circuit Court of Appeals requesting that the Court reverse US District Judge Brian M. Cogan’s judgment imposing nearly $150 million in damages and a permanent injunction as the company was complying with Chinese laws and regulations by fixing prices on Vitamin-C exports. In its brief, which will be posted on my blog, Hebei and NCPGC specifically state in part:
“The district court imposed nearly $150 million in penalties and a permanent injunction on Appellants for complying with their own nation’s laws and regulations in reaching price and output agreements on vitamin C exports. The text of the applicable regulations, authoritative legal interpretations offered by the Chinese government, unrebutted expert testimony on Chinese law, and other evidence that the Chinese government mandated the challenged conduct had no impact on the district court. Rather, the court attacked the credibility of the Chinese government and seized on translated words without due regard for their cultural and linguistic context in order to hold that China’s regime of export regulations for vitamin C constituted a purely private “cartel.” Proper regard for Chinese sovereignty should have led to dismissal of Appellees’ claims under the doctrines of foreign sovereign compulsion, international comity, act of state, or political question. The judgment below represents a massive extension of U.S. federal judicial power into the affairs of a sovereign nation and matters of foreign affairs. This Court should hasten to repudiate it.
The new system was intended to facilitate China’s entry into the World Trade Organization (“WTO”) and avoid antidumping sanctions imposed by foreign governments while maintaining the Ministry’s policy of ensuring the orderly development of key export industries, such as vitamin C. . . The Ministry explained that the new system would be “convenient for exporters while it is conducive for the chambers to coordinate export price and industry self-discipline.”
As could be predicted, the Chinese government has taken umbrage at the district court judgment. Chinese officials have noted the judgment will “cause problems for the international community” and “eventually harm the interests of the United States. . . . Leading commentators have observed that the case “has potentially expansive implications for how the U.S. antitrust laws do and should interact with executive branch and foreign interests on international trade,” “is at least in tension with the executive branch’s position [in the WTO],” and “rais[es] the question of whether our antitrust laws ought to be interpreted as giving greater deference to the sovereignty of individual U.S. states than to the sovereignty of foreign governments.” . . . .
The district court’s dismissal of the government’s views was both disrespectful and unfounded. The WTO filings and reports on which the district court relied to claim the Chinese government had taken contrary positions before that body (essentially accusing a sovereign government of lying) do not stand for the proposition that China imposed no legal obligation on vitamin C producers to coordinate on export pricing and output. . . . Rather, they only state that China had abandoned “restrictions on exports through non-automatic licensing or other means justified by specific product under the WTO Agreement or the Protocol,” “[n]on-automatic export licensing requirements under WTO agreement and accession,” and “export quotas and licenses[.]” . . . .
None of them said that China had abandoned management of pricing in vitamin C exports, let alone that the Chinese regulatory regime had become non-compulsory. The Chinese government’s representations in both forums were perfectly consistent.
Finally, the U.S. Trade Representative and the WTO have found that the Chinese government continued to regulate export pricing on a variety of products subject to the same basic regulatory regime as vitamin C during the relevant time period, and that failure to comply was “subject to investigation leading to potential criminal and administrative penalties.” . . . . This evidence further illustrates that the district court’s construction of Chinese law was erroneous. . . .
As discussed above, there is a true conflict between Chinese law and U.S. law in these circumstances. All Defendants were Chinese and the conduct took place entirely in China. Complaints about Chinese export policies could properly be addressed through diplomatic channels and/or the WTO’s processes. The purpose was not to harm Americans but to ease the transition of China’s vitamin C industry from central planning to a more market-oriented program and to prevent the harm to China’s trade relations that would result from dumping charges. The exercise of jurisdiction by the district court has already inflicted harm on U.S.- China relations. The court’s decision creates the prospect of Chinese firms being under conflicting conduct requirements. The U.S. and China are both members of the WTO and are subject to its rules on export restrictions. Simply put, every relevant substantial consideration favors comity abstention.
This case raises precisely the same set of concerns about the inappropriateness of the judicial branch treading on delicate foreign policy questions. The Chinese government chose to regulate its domestic vitamin C export industry in what it believed was the most effective manner within its system. Insofar as China’s sovereign policy decisions about how best to manage its economy conflict with the policies embodied in U.S. antitrust laws, that conflict should be addressed “through diplomatic channels,” and not through the “unnecessary irritant of a private antitrust action.” . . .
For China’s economic regulations and enforcement practices “to be reexamined and perhaps condemned by [U.S.] courts . . .would very certainly imperil the amicable relations between [the U.S. and Chinese] governments and vex the peace of nations.” . . .Indeed, the U.S. and Chinese governments are currently engaged in ongoing discussions on issues involving Chinese regulation of its exports, and the U.S. has availed itself of WTO dispute settlement procedures against China based on the WTO’s rules on export restrictions. . .. The U.S.’s active engagement in these avenues for resolving disputes between sovereign governments demonstrates that disputes involving China’s regulation of its own exports are foreign relations issues properly committed to the Executive Branch. The U.S. judiciary should be loath to insert itself into such discussions.”
On April 14, 2014, the Chinese Ministry of Commerce (“MOFCOM”) filed its own Amicus Brief in support of the two Chinese companies. In the attached Amicus Brief, MOFCOM VITAMIN C APPEAL BRIEF MOFCOM stated:
“The Ministry of Commerce of the People’s Republic of China (“MOFCOM”) is a component of the central Chinese government and the highest administrative authority in China authorized to regulate trade between China and other countries, including all export commerce. It is the equivalent in the Chinese governmental system of a cabinet-level department of the United States government. MOFCOM formulates strategies, guidelines, and policies concerning domestic and foreign trade and international cooperation. MOFCOM also drafts and enforces laws and regulations governing domestic and foreign trade, and regulates markets to achieve an integrated, competitive, and orderly market system.
MOFCOM has been actively involved in this litigation since 2006, when it filed an amicus brief in support of defendants’ motion to dismiss. That appearance was historic. It marked the first time that any entity of the Government of China had appeared as an amicus, explained to the district court that MOFCOM had directed the defendants’ conduct, and endeavored to describe the varying regulatory mechanisms used to compel defendants’ compliance.
MOFCOM has a compelling interest in this appeal because the district court refused to defer to MOFCOM’s interpretation of Chinese law and announced its own contrary view of what Chinese law required of the defendants. Moreover, the district court implied that MOFCOM’s interpretation was not just wrong, but intentionally false: “a post-hoc attempt to shield defendants’ conduct from antitrust scrutiny.” That charge is profoundly disrespectful, and wholly unfounded.
MOFCOM files this brief to set straight the record about its regulatory and litigation conduct; to ensure that this Court understands the Chinese Government’s displeasure about the district court’s treatment of MOFCOM; and to urge reversal of the judgment below, which unfairly penalizes a Chinese company for complying with Chinese law. . . .
The district court denied summary judgment. It did not question the basic tenets of the foreign sovereign compulsion doctrine, but held on the basis of its independent assessment of Chinese law, and in direct contradiction to MOFCOM’s interpretation, that Chinese law “did not compel defendants’ conduct.” . . . The district court acknowledged that both the Supreme Court and the Second Circuit have held that a foreign government’s statement concerning the meaning of its own law is “‘conclusive’” of that law’s meaning. . . .
The district court then announced it would “decline to defer to [MOFCOM’s] interpretation of Chinese law,” . . . citing this Court’s statement that “[w]here a choice between two interpretations of ambiguous foreign law rests finely balanced, the support of a foreign sovereign for one interpretation furnishes legitimate assistance.” . . . The district court appeared to draw from this that deference is unwarranted if a foreign law question is not “finely balanced,” and outlined its grounds for refusing to defer in this case. . . . The district court first said that the 2009 statement was “particularly undeserving of deference” because it did not “cite to any [specific] sources to support its broad assertions about the regulatory system governing vitamin C exports,” contained “ambiguous terms and phrases,” and did not “distinguish between” the 1997 and 2002 export regulatory regimes. . . . The district court conceded, however, that MOFCOM’s amicus brief, on which the 2009 statement expressly relied, “attempted to explain the regulatory system governing vitamin C exports by citing to, and discussing, specific governmental directives and Chamber documents.” . . .
The district court next pointed to statements China had made to the World Trade Organization (“WTO”) indicating that “‘export administration … of vitamin C’” ceased on January 1, 2002. It asserted that this statement “appear[ed] to contradict [MOFCOM’s] position in the instant litigation,” and deemed this a “further reason not to defer.” . . .
Third, the district court stated that “more careful scrutiny of a foreign government’s statement is warranted” when “the alleged compulsion is in the defendants’ own self-interest.” . . . . Finally, the district court opined that “the factual record contradicts [MOFCOM’s] position.” . . .
Having thus determined that it would not defer to MOFCOM’s interpretation of Chinese law, the district court conducted an independent review of Chinese law, including documents the court described as “traditional sources of foreign law.” . . . . The district court at points suggested it would rely on the “plain language” of these documents, . . ., but its analysis also contained a series of inferences about how to interpret Chinese legal texts. None of those inferences was premised, at least expressly, on any principle of Chinese law. . . .
The district court erred by disregarding MOFCOM’s formal statements of Chinese law, conducting an independent examination of that law based on “plain language” of translated texts and ungrounded assumptions about how to interpret Chinese law, and declaring that MOFCOM’s interpretation of Chinese law was exactly backwards. The court’s erroneous conclusions were not supported by any determination of any Chinese government official, Chinese court, or Chinese scholar, and yet exposed Chinese companies to massive class-action antitrust liability for conduct occurring solely within China. Several companies yielded to that in terrorem pressure and settled. The remaining defendants face a nine-figure judgment that should be vacated for at least three reasons.
First, the district court failed to follow Supreme Court precedent holding that a foreign government’s formal statements about the interpretation of its own law are “conclusive” in American courts.
Second, the district court overlooked comity concerns that at a minimum demand that “conclusive” deference to such statements must be given when foreign sovereign compulsion is asserted as a defense in a private antitrust suit. The foreign sovereign compulsion doctrine owes its very existence to the recognition that significant questions of international law and comity would arise if U.S. courts allowed American law to override a foreign sovereign’s contrary command about how to organize its own domestic commerce. When a foreign sovereign appears in such a case to say what it demanded of a defendant, it should not be open to a district court to deny the command was given.
Third, the district court expressly “decline[d] to defer to [MOFCOM’s] interpretation of Chinese law.” Instead, the district court simply resolved all questions as it saw fit, applying self-made interpretive canons not grounded in Chinese law, and as such reached a conclusion that is contrary to Chinese law.
The district court’s approach and result have deeply troubled the Chinese government, which has sent a diplomatic note concerning this case to the U.S. State Department. This Court should reverse, and in so doing reaffirm that principles of international comity require district courts to treat official statements of a foreign government with a high degree of deference and respect, and with due caution about the court’s ability to determine accurately the law of an unfamiliar legal system. . . .
The district court asserted that China’s statements to the WTO that it had given up “‘export administration … of vitamin C’ as of January 1, 2002,” “appear to contradict” MOFCOM’s position that Chinese law continued after that date to require industry coordination of export price and quantity. . . . That conclusion, however, reflects a basic misunderstanding of the technical trade-policy context in which those statements were made.
The statements cited by the district court relate to a “transitional review” in which China participated following its 2001 accession to the WTO. Each statement provides in part that “on 1 January 2002, China gave up export administration” of certain goods, including “vitamin C.” But in context—and as indicated by the headings that preceded them—these statements indicated only that China abandoned “restrictions on exports through non-automatic licensing” on that date, and not that China eliminated every existing export restriction in one stroke.
A third document cited by the district court unambiguously demonstrates that this more confined reading is precisely what China intended. That document . . . is a report by the WTO Secretariat summarizing its “trade policy review” with respect to China. Citing one of the two “export administration” statements described above, the WTO Secretariat explained that “[o]n 1 January 2002, China abolished export quotas and licenses for … Vitamin C.” Thus, the WTO Secretariat expressly interpreted China’s earlier “export administration” statements to relate to abolition of “export quotas and licenses for … Vitamin C,” but not all other forms of export regulation.
The United States government adopted exactly this same construction in a 2009 WTO dispute resolution proceeding, alleging (as China later acknowledged), that China had maintained “a system that prevents exportation unless the seller meets or exceeds the minimum export price.” In other words, the United States adopted exactly the same position in WTO dispute settlement proceedings that MOFCOM has urged in this case: after 2002, China was still requiring exporters to abide by a price-setting regime. China’s statements to the WTO, accordingly, did . . .not provide any basis for the district court to refuse to accord MOFCOM deference. . . .
MOFCOM grants that a district court that faces a contested question of foreign law with no aid from a foreign government often will have no choice but to grasp the nettle and do its best. But here, the district court’s confusion was self-inflicted. MOFCOM offered an authoritative view of Chinese law. The district court erroneously refused that assistance and then, predictably, floundered in its attempt to discern the operation of a complex foreign regulatory system. The district court instead should have deferred, as it unquestionably would have been required to do had a U.S. regulator presented an analogous statement in a brief. . . . Its failure to do so, or at a minimum to apply Chinese legal principles to its independent analysis, requires reversal.”
US JUDGE REFUSES TO DISMISS US ANTITRUST CASE AGAINST CHINESE SOLAR COMPANIES
On March 31, 2014, Judge Armstrong of the California Federal District Court rejected the Chinese solar companies’ motion to dismiss The Solyndra Residual Trust vs. Suntech Power Holdings, Suntech America, Trina Solar Limited, Trina US, Yingli Green Energy Holding Ltd, Yingli Green Energy Americas Inc (“Solyndra v. Suntech”) antitrust case. In the attached decision, Solyndra order denying motion to dismiss Judge Armstrong stated:
“According to Plaintiff, the alleged price fixing scheme which led to the demise of Solyndra and numerous other American solar panel manufacturers was perpetrated by Suntech, Trina and Yingli (all of which are publicly-traded on the New York Stock Exchange), and their respective American alter egos, Suntech America, Trina U.S. and Yingli Americas. . . . Defendants are members of the China New Energy Chamber of Commerce (“China New Energy”), a trade association which has the stated purpose of promoting “collaboration” amongst its members. . . . Through China New Energy, Defendants were able to meet regularly and develop a coordinated pricing and output strategy aimed at dominating the United States solar panel market. . . .
Defendants, desiring to dominate the United States market for solar panels, became concerned with the innovation presented by Solyndra’s technology. . . . To that end, Defendants allegedly formed a conspiracy to “dump” (i.e., to price their panels below cost) their solar panels in the United States market. . . To that end, as demand for solar panels was rising, Defendants acted contrary to “rational economic rules” by “slash[ing] their prices in an effort to aggressively capture market share and drive competition from the marketplace.” . . .
Defendants also are alleged to have used China New Energy to fix prices at artificially low rates. . . . Each year since founding in 2006, China New Energy has held an International Forum (“Forum”), at which the chairs of Suntech, Trina and Yingli have been featured speakers. . . . Defendants allegedly used China New Energy’s annual International Forum as a means of meeting and communicating with one another and reach agreements to fix and lower prices. . . . After each Forum, prices charged by each of the Defendants fell precipitously. . . .For example, after meeting during the second Forum which held on December 11-12, 2007, Defendants lowered their prices by 40%. . . . This pricing behavior “shocked” even seasoned industry analysts, who had predicted price reductions of only 5% per year. . .
As prices for Chinese solar panels in the United States plummeted, American solar manufacturers could not keep pace. . . Since 2010, “at least twelve domestic U.S. manufacturers have shut down plants, declared bankruptcy, or staged significant layoffs.” . . .
In contrast, Defendants now occupy a dominant position in the American solar panel market, and by the end of 2011, controlled 65% of the rooftop solar market. . . . Correspondingly, Defendants’ net revenues soared, with Suntech’s net revenue alone increasing to $3.1 billion in 2011 from $1.6 billion in 2009. . . .
Here, the pleadings specifically allege facts that are more than sufficient to suggest that Defendants reached an agreement to fix prices and flood the American market with their below cost Chinese-made panels for the purpose of stifling competition. The FAC alleges that Defendants effectively controlled their industry trade organization, China New Energy, and held meetings at its annual Forums to coordinate their market strategy including the coordinated, drastic lowering of prices to dominate the American market for solar panels. After each Forum held between 2007 and 2010, Defendants’ prices uniformly fell precipitously. These uniform price decreases were completely unanticipated within the industry, given that it was economically irrational to slash prices so significantly in the face of rising demand. . . . . Allegedly as a result of Defendants’ predatory and collusive conduct, Solyndra and a host of other American competitors went out of business, while Defendants correspondingly increased their sales and market share in the United States. . . .
Construing these allegations in a light most favorable to Plaintiff, the Court finds that they are sufficient to present a plausible claim that Defendants formed an agreement to restrain trade.”
CHINA ANTITRUST CASES
Commentators have observed that governments are increasingly using antitrust and other regulatory powers for broader political and economic purposes and following the Commerce Department’s lead, the Chinese government is doing the same.
On January 28, 2014, there was a report out of China that Qualcomm is facing a record antitrust fine of $1 billion in an antitrust case from China’s National Development and Reform Commission (NDRC).
In the US National Trade Estimate report, its annual reports on trade barriers, released on March 31, 2014, 2014 NTE Report on FTB the USTR expressed concerned about the deteriorating conditions for US companies operating in or hoping to export to China across a broad range of sectors, due to selective anti-monopoly law enforcement. With regards to stepped-up enforcement of anti-monopoly laws by China’s National Development and Reform Commission (NDRC), the USTR stated in its March 31st report:
The Chinese government’s interventionist policies and practices and the large role of SOEs in China’s economy have created some uncertainty regarding how the Anti-Monopoly Law will be applied. One provision in the Anti-Monopoly Law protects the lawful operations of SOEs and government monopolies in industries deemed nationally important. To date, China has enforced the Anti-Monopoly Law against SOEs, but concerns remain that enforcement against SOEs will be more limited.
In 2013, NDRC increased its enforcement activity noticeably, particularly against foreign enterprises. In addition, U.S. industry has expressed concern about insufficient predictability, fairness and transparency in NDRC’s investigative processes, including NDRC pressure to “cooperate” in the face of unspecified allegations or face steep fines. U.S. industry also has reported pressure from NDRC against seeking outside counsel, in particular international counsel, or having counsel present at meetings.”
EXPLOSIVE GROWTH IN CHINESE ANTITRUST CASES
A recent report by John Yong Ren, a well-known Chinese antitrust lawyer, states that there was an explosive growth in antitrust cases under China’s anti-monopoly law in 2013, with even more cases coming in 2014. T&D Monthly Antitrust Report of March 2014
It was reported that both the Justice Department and now the NDRC have started investigations of Auto Parts and are targeting capacitor manufacturers.
On March 11, 2014, in the attached complaint, AGFEED COMPLAINT the Securities and Exchange Commission (“SEC”) filed suit against Agfeed Industries, Junhong Xiong, Selina Jin, Songyan Li, Shaobo Ouyang, Edward J. Pazdro and K. Ivan Gothner for accounting fraud. The SEC sued bankrupt AgFeed Industries Inc. and former principals of the company over an alleged accounting fraud scheme, in which revenues were inflated by $239 million in order to boost the industrial hog producer’s stock price.
Four executives at the China-based but U.S.-traded company purportedly used a variety of methods to inflate revenue from 2008 through 2011, such as faking invoices for sales of feed and nonexistent hogs, which executives later tried to cover up by claiming the bogus hogs had died.
According to Andrew J. Ceresney, director of the SEC’s Enforcement Division, “AgFeed’s accounting misdeeds started in China, and U.S. executives failed to properly investigate and disclose them to investors. This is a cautionary tale of what happens when an audit committee chair fails to perform his gatekeeper function in the face of massive red flags.”
According to the SEC the fraud started in China and U.S. management eventually got wise to the fraud, which included keeping two sets of books: one for insiders with accurate information, and one with inflated figures shown to outside auditors. But instead of intervening, US management moved to spin off the company’s feed division and reported nothing about the incident to law enforcement or investors.
FOREIGN CORRUPT PRACTICES ACT—EXTRADITION OF FOREIGN NATIONALS TO FACE US JUSTICE
On April 2, 2014, the US Government indicated six foreign nationals in an alleged conspiracy to bribe Indian officials to approve a $500 million titanium mining project.
Dmitry Firtash, identified by prosecutors as the leader of the alleged conspiracy, co-owns RosUkrEnergo with the Russian gas company Gazprom, and controls international conglomerate Group DF that owns several mining companies.
Firtash was arrested in Vienna on March 12 and later released on about $174 million bail. Prosecutors are seeking forfeitures of about $10.6 million from the defendants.
Prosecutors additionally want Firtash to forfeit his interests in Group DF and its assets, including more than 150 companies in the British Virgin Islands, Switzerland and Cyprus. The foreign nationals face up to 20 years in prison for the most serious charges and up to a million dollars in fines.
In announcing the indictment in the attached statement, FOREIGN INDIVIDUALS PROSECUTED UNDER FCPA the Justice Department stated:
“Fighting global corruption is part of the fabric of the Department of Justice,” said Acting Assistant Attorney General O’Neil. “The charges against six foreign nationals announced today send the unmistakable message that we will root out and attack foreign bribery and bring to justice those who improperly influence foreign officials, wherever we find them.”
“Criminal conspiracies that extend beyond our borders are not beyond our reach,” said U.S. Attorney Fardon. “We will use all of the tools and resources available to us to ensure the integrity of global business transactions that involve U.S. commerce.”
“This case is another example of the FBI’s willingness to aggressively investigate corrupt conduct around the globe” said Special Agent in Charge Holley. “With the assistance of our law enforcement partners, both foreign and domestic, we will continue to pursue those who allegedly bribe foreign officials in return for lucrative business contracts.”
Tom Gorman, a Dorsey partner in our Washington DC office, who formerly worked in the SEC enforcement division, has described this indictment as follows:
“FCPA enforcement officials have repeatedly emphasized that they intend to focus on individuals as an effective means of halting possible violations. A case unsealed yesterday underscores this point.”
See his entire article on his blog at http://www.secactions.com/fcpa-a-focus-on-individuals/
SEC GETS $33 MILLION DOLLAR DEFAULT JUDGMENT AGAINST CHINESE ELECTRONICS COMPANY AND EMPLOYEES
On March 10, 2014, in SEC v. China Intelligent Lighting & Electronics Inc. et al, a New York Federal Judge issued the attached default judgments NDEF IDEF in favor of the U.S. Securities and Exchange Commission and against two Chinese electronic companies accused of misleading investors about the use of money from public offerings, ordering the companies to pay a total of almost $33 million.
On March 27, 2014, the SEC filed suit against World Capital Market Inc, WCM777 Inc. WCM777 Ltd. d/b/a WCM777 Enterprises and Ming Xu a/k/a Phil Ming Xu and Kingdom Capital Market, Manna Holding Group, Manna Source International, WCM Resources, Aeon Operating and PMX Jewels for securities fraud. As described in the attached complaint SEC WORLD CAPITAL MARKETS,
“This matter involves an ongoing pyramid scheme, Ponzi scheme, and misappropriation of investor funds through an unregistered securities offering that targets members of the Asian-American and Hispanic-American communities, as well as foreign investors. Beginning around March 2013 and continuing to the present, operating under the offering name “WCM777,” Defendants have collected over $65 million from investors in the United States and abroad. Of that amount, over $28 million was deposited into bank accounts in the United States between March and October 2013. After October 2013, Defendants deposited investor funds into a bank account in Hong Kong.”
Apparently, the investors were not only in the US, but also in China and Hong Kong.
In the attached complaint, a Brad Berkowitz has filed a class action securities case against Sino Gas and several Chinese individuals and companies. SINO GAS
If you have any questions about these cases or about the US trade, customs, 337, patent, US/China antitrust or securities law in general, please feel free to contact me.